Americans’ Spending Habits Could Impact Economy
Americans have played a crucial role in preventing a recession over the past year by maintaining strong spending. However, with various factors influencing consumers to tighten their belts, economists are becoming more concerned about a potential downturn.
According to the University of Michigan’s consumer sentiment survey, public opinion of the economy is currently hovering near recession levels, despite positive indicators such as low unemployment and cooling inflation. Economist Darren Grant’s recent paper reveals that people’s perception of spending power has taken precedence, leading to a significant deterioration since the start of the pandemic.
While household savings reached an all-time high at the beginning of 2020, Federal Reserve data shows that disposable income levels have returned to pre-pandemic levels. The personal savings rate in the US, as reported by the Bureau of Economic Analysis, currently stands at 4.6%, well below the multi-decade average of 8.9%. Sit Investment Associates’ senior portfolio manager, Bryce Doty, predicts that once savings drop to around $300 billion, spending will hit a wall. He acknowledges that these savings have buoyed the economy more than expected, but a transformation is imminent, with a reprioritization of spending likely to occur.
The impact of consumer belt-tightening is evident in the luxury goods market, where prices for items like luxury watches have fallen to two-year lows. Demand for top brands like Rolex and Patek Philippe has slowed significantly. Additionally, Americans are increasingly relying on credit cards, resulting in nearly $1 trillion of credit card debt, which, while lesser than last year’s 9% inflation rate, still eats into wage gains.
Even though wage increases have finally caught up to inflation in June, after two years of lagging behind, the Bureau of Labor Statistics reveals that real hourly compensation since 2020 has experienced the sharpest decline relative to any other period since World War II.
Looking toward the fall, Morgan Stanley strategists suggest that discretionary spending may witness the steepest decline as consumers face mounting financial pressure, including the resumption of student loan payments. Approximately one-third of borrowers feel uncertain about meeting their student loan obligations, with estimates indicating an average payment of $300-$400 per month. Consumer uncertainty coincides with a decrease in spending, which has propped up the economy amid recessionary concerns.
Despite these challenges, there is a potential silver lining: there are currently 1.8 job openings per person. The unemployment rate in May was 3.7%, slightly up from December’s 3.5%, contrary to the Fed’s initial prediction of a climb to 4.6% by the end of 2023. According to Doty, there is still significant demand for staffing across various sectors, which may help mitigate the impact of reduced consumer spending.
As consumers continue to face financial constraints, it remains to be seen how their spending habits will influence the economy in the coming months. The reestablishment of student loan payments, combined with other financial pressures, may cause discretionary spending to decline. However, the availability of job opportunities could alleviate some of the strain.
